American FinTech market shows its stripes – four major innovations to make us richer and happier

By Ian Jackson | 19 March 2015

As a leading outsourcing partner and operations consultant to the FinTech world in the US, I get to speak with a lot of very interesting companies spanning many niches. It continues to amaze me how well envisioned, executed, and value laden many of these new offerings are. It is exciting to anticipate a future state, of personal finance in particular, with better products for people at different stages of their financial lifecycle. I’m going to showcase some of the most interesting ones I’ve had the pleasure to discover in the past 12 months.

Micro Saving app - a virtual piggy bank

Many people do not save any money in any kind of structured way. Saving and investing for many seems like an effort, and something for which they have no spare capacity. A company looking to address this is micro-savings provider Acorns. Based in California, the company currently provides a mobile app for US residents, and intends to extend out internationally. What the app does is allows you to automatically round up any purchases you make on your credit or debit cards, and save the pennies. The money is harvested from a bank account every week or so based on how many transactions you make.  Once transferred across, the money is invested in a portfolio based on your risk tolerance and investment goals.

Acorns is the sort of app that it is good to get addicted to. You can deposit or withdraw any time from your phone; your money is not locked away. For new investors they can start to get familiar with risk, volatility, fees and investment horizons, and putting their money to work somewhere different than savings accounts which currently can only deliver a very dull 0.10%.

The app can also change behavior. Rather than rounding up all your meal tips for the waiter or waitress, like me you might find yourself properly applying a percentage to ensure you get your Acorns deposits moving. I am hopeful that apps such as Acorns will encourage better financial literacy, in the way that Investment Trust investment plans did for UK retail investors in the 1980s and 1990s.

Planning for your volatile life like a pro

Aspiration is a fund manager that recently launched its first fund in the US. There are many things that are novel about the approach of Aspiration, led by CEO Andrei Cherny, also known for being the youngest speechwriter for a US President, a financial fraud prosecutor and a leading political thinker in the Democrat party.

Aspiration allows you to define what fee you want to pay (you can pay them anything from 0 to 2%). Both transparency on fees and an ability to set them based on how well you view the fund manager is working for you is unquestionably a bold and differentiated strategy.

Secondly you get to invest in strategies normally reserved for High Net Worth individuals. With a minimum investment of $500, their flagship fund promises higher absolute returns and lower expected volatility than a pure equity fund.

Third, the company allows you to donate some of your fund value and/or profits in charities from within the application. This handles all the other stuff that tax payers care about – i.e. end of year tax forms. You have a range of causes to choose from. The effect this has on the investor is interesting – it draws you back to considering how lucky you are to have savings and investments and makes you consider those less fortunate, and your interest in helping them.

The goal of Aspiration seems to be to work with the mass affluent who have lost faith in banks both from an operational and moral standpoint. The lack of product innovation at major banks and institutions is well documented. A lack of a real response to the agency issues highlighted in the post Lehman era leaves a high ground just waiting for a champion to take it. Enter Aspiration, a company with values, principles and other words many don’t associate with financial professionals any more.

Faster, better mortgage applications

I recently chanced upon Movement Mortgage. It was only through studying them that I realised a major difference in the mortgage application process in the US and the UK. In the UK, generally you get a conditional offer of a loan based upon your income, other debts and assets, and an assessment of your credit worthiness. In the US, nothing as straight forward happens. As a mortgage holder who has been through it myself, I believe the process is that you speak with a mortgage broker who gives you an indication of rates and payments and loan amount, but only once you’ve had an offer accepted does anyone normally start underwriting.

Movement Mortgage have not only innovated in the US market with upfront underwriting, they also aim to get you this in 7 days of applying. This removes all the stress that a US homebuyer (and seller) often gets towards the end of the regular process as your broker searches for a deal and a rate you can afford.

It must be working, as Movement is one of the fastest growing mortgage banks in the US. I am sure that it is going to be very difficult for traditional mortgage providers to re-engineer their processes, given how embedded they are.

Like Aspiration, there is a sense of belief and purpose beyond profit associated with the growth of Movement. Their strongly held and communicated corporate values are a stiff counterpoint to the majority of financial institutions and other companies who think “our people are our difference” is both unique and differentiating.

Money for Nothing

Finally I’d like to highlight the unique and valuable proposition of new FinTech firm Max My Interest. The firm has developed a technology that allows you to take advantage of the best interest rates on offer via FDIC-insured deposits in the US. This is a great innovation for those with major cash balances.

Anyone with a US tax identifier and mailing address can set up an account, regardless of where they live in the world. Once established, the proprietary Max technology will take excess funds sitting in low performing savings and checking accounts and move it into FDIC-protected accounts with online banks in the US that offer among the greatest interest rates at the time.

Max will rebalance for you monthly to maximise your returns using the best rates then available, and will also act as a cash sweep to keep the right amount in your checking accounts. The annual fee of 0.08% seems extremely fair when you are talking about moving money from 0.10% accounts to accounts paying 0.90% to 1.00%.

Max is not a bank and does not replace your existing bank accounts; it simply acts as a sort of “air traffic control” for your cash, helping spread it more efficiently across your own accounts. It does raise issues though with the inherent agency issue you find with banks and their advice, which will always be to choose their own products, even when not competitive. You could manually replicate the Max algorithm, give or take, to save yourself those eight basis points. But by fully automating the process Max delivers a significant value, and reduces your admin time and risk of error.

It’s easy to get a sense of why more people will chose Max rather than try to optimise their cash by hand.

Conclusions

From savings, thru investments and mortgages, there is quite clearly a new wave of businesses solving real personal finance problems in the US. Their technical delivery in each case is, to me, way beyond my experience in terms of user experience with more mainstream US financial institutions.

And all four also do a phenomenal job of making the esoteric or complex just a little more understandable. For this drive for clarity of thinking and purpose alone we must be thankful and optimistic.

 

By Ian Jackson, Managing Partner, Enshored and bobsguide Contributing Editor